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[True, False or Uncertain] If prices double and quantities double from one decade to the next...

[True, False or Uncertain] If prices double and quantities double from one decade to the next than inflation was 100%.  

Indicate the best answer and then explain (if true why it is true; if false provide a counter-example).

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Answer #1

The correct answer is "True"

This can be explained with the help of an example -

  • Assume a good cost $10 in 2010 and the quantity of the good is 10.
  • In 2020, the good cost $20 and the quantity is 20.

As a first step, we calculate the Consumer Price Index for 2010.

CPI for 2010 = [ Cost of Basket of Good in 2010 / Cost of Basket of Good in 2010 ) * 100 = [ ( 10 * 10 ) / ( 10 * 10) ] * 100

CPI for 2010 = 100 [ since 2010 is the base year ]

CPI for 2020 = [ Cost of Basket of Goods in 2020 / Cost of Basket of Goods in 2010 ) * 100 = [ ( 20 * 10 ) / ( 10 * 10) ] * 100

CPI for 2020 = 200 [ Note: quantity is taken from the base year ]

Finally,

Inflation = ( [ CPI for 2020 - CPI for 2010 ] / CPI for 2010 ) * 100

Inflation = ( [ 200 - 100 ] / 100 ) * 100

Inflation = 100%

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